What is Oil and Gas Outsourcing?
Oil and gas outsourcing refers to the practice of contracting specialized back-office functions to third-party service providers rather than handling them in-house. For oil and gas operators, this typically includes revenue accounting, owner relations, joint interest billing, regulatory reporting, and other administrative functions that support drilling and production operations. Outsourcing allows operators to focus their internal resources on core activities like exploration, drilling, and production while experienced specialists handle the complex administrative workload.
The oil and gas industry has unique accounting and administrative requirements that differ significantly from other industries. Revenue must be allocated among numerous interest owners based on complex decimal calculations. Regulatory filings must be submitted to multiple state agencies. Owner communications must address questions about payments, deductions, and production. These specialized functions require systems, expertise, and staffing that many operators find more efficient to outsource.
Core Operator Services
Revenue Accounting
Revenue accounting is the process of receiving production proceeds from purchasers, calculating the amounts due to each interest owner, and distributing payments. This involves processing remittance statements from oil and gas purchasers, applying the correct decimal interest for each owner, calculating and withholding applicable taxes and deductions, and generating owner check stubs with payment details. Revenue accountants must understand complex ownership structures, pooling arrangements, and the specific provisions of individual leases.
Division Order Processing
Division orders establish the decimal interest each owner holds in a well and authorize the operator to make revenue distributions. Division order processing includes title review to determine ownership, calculation of decimal interests based on lease terms and pooling arrangements, preparation and distribution of division orders to owners, and tracking returned orders and resolving discrepancies. Accurate division orders are essential for proper revenue distribution and avoiding payment disputes.
Joint Interest Billing (JIB)
Joint interest billing is the process of allocating drilling and operating costs among working interest owners. When an operator drills or operates a well, costs are shared by all parties holding working interests according to their ownership percentages. JIB involves coding invoices to the appropriate well and cost category, calculating each working interest owner’s share, generating and distributing monthly billing statements, and tracking payments and following up on delinquent accounts. Timely and accurate JIB processing is essential for maintaining cash flow and partner relationships.
Owner Relations
Owner relations encompasses all communication and service provided to royalty and working interest owners. This includes responding to owner inquiries about payments, deductions, and production, processing address changes and ownership transfers, managing direct deposit enrollments, handling escheatment and unclaimed property compliance, and resolving payment discrepancies and disputes. Professional owner relations builds trust with stakeholders and reduces the administrative burden on operators.
Suspense Management
Suspense refers to revenue held by an operator that cannot be distributed due to title issues, missing owner information, or unresolved disputes. Suspense management involves tracking all funds held in suspense, researching and resolving the issues preventing distribution, maintaining proper documentation for regulatory compliance, and working to reduce suspense balances over time. Effective suspense management protects operators from liability and ensures owners receive their entitled funds.
Regulatory Reporting
Oil and gas operators must file numerous reports with state and federal agencies. Regulatory reporting includes production reports to state oil and gas commissions, severance and production tax filings, environmental compliance reports, well status and activity reports, and unclaimed property reports for escheatable funds. Each state has different requirements and deadlines, making multi-state compliance particularly complex.
Benefits of Outsourcing for Operators
Focus on Core Operations
By outsourcing back-office functions, operators can concentrate their management attention and capital on what they do best—finding and producing oil and gas. Rather than building and maintaining administrative infrastructure, operators can direct resources toward exploration, drilling, completion, and production optimization. This strategic focus often leads to better operational results and returns.
Access to Specialized Expertise
Outsourcing providers specialize in oil and gas accounting and administration. Their staff understands the unique requirements of the industry, from complex decimal calculations to state-specific regulations. This expertise would be difficult and expensive for individual operators to develop and maintain in-house, particularly for smaller operators who may not have sufficient volume to justify dedicated specialists.
Scalability
Outsourcing provides flexibility to scale administrative capacity up or down based on activity levels. When operators drill new wells or acquire properties, outsourced services can expand to handle increased volume without the delays of hiring and training new staff. Conversely, during slower periods, operators are not burdened with fixed overhead for administrative functions.
Technology and Systems
Professional service providers invest in specialized software and technology platforms designed for oil and gas accounting. These systems automate calculations, integrate with purchaser and regulatory systems, and provide robust reporting capabilities. Operators benefit from these technology investments without bearing the full cost of implementation and maintenance.
Risk Mitigation
Outsourcing to established providers can reduce operational risk. Reputable providers maintain business continuity plans, disaster recovery capabilities, and internal controls. They often hold SOC certifications demonstrating that their processes meet established standards. This reduces the risk of service disruptions, data loss, or control failures that could impact an operator’s business.
Types of Operators Who Outsource
Small to Mid-Size Operators
Smaller operators often lack the scale to justify full in-house accounting departments. Outsourcing provides access to professional services at a cost that scales with their activity level. These operators can compete effectively without the overhead burden of building administrative infrastructure.
Private Equity-Backed Operators
Operators backed by private equity investors often outsource to maintain lean organizational structures and maximize returns. PE sponsors appreciate the variable cost structure of outsourcing and the ability to scale operations quickly during growth phases or portfolio company acquisitions.
Operators Entering New Regions
When operators expand into new states or basins, they face unfamiliar regulatory environments and may lack local relationships. Outsourcing to a provider with multi-state capabilities provides immediate access to regional expertise without the learning curve of building in-house knowledge.
Operators During Transitions
Companies going through acquisitions, divestitures, or management transitions often use outsourcing to maintain continuity. During periods of organizational change, outsourced services provide stability and ensure that critical functions continue without interruption.
Selecting an Outsourcing Provider
Operators evaluating outsourcing providers should consider several key factors:
- Industry Experience – How long has the provider been serving oil and gas clients? Do they understand the unique requirements of the industry?
- Service Scope – Does the provider offer all the services you need, or will you need multiple vendors?
- Geographic Capabilities – Can the provider handle operations in all states where you have properties?
- Technology Platform – What systems does the provider use? Can they integrate with your existing technology?
- Scalability – Can the provider grow with you as your operations expand?
- Controls and Compliance – Does the provider have SOC certifications or other evidence of strong internal controls?
- References – Can you speak with current clients about their experience?
- Transition Support – How will the provider handle the transition of work from your current process or provider?
The Transition Process
Transitioning back-office functions to an outsourcing provider requires careful planning and execution. The process typically includes:
Discovery and Planning
The provider reviews your current operations, systems, and data to understand the scope of work. Together, you develop a transition plan with timelines, milestones, and responsibilities. This phase identifies potential issues and establishes success criteria.
Data Migration
Your existing data—owner master files, well information, historical transactions—must be transferred to the provider’s systems. This requires careful mapping, validation, and reconciliation to ensure accuracy. Clean data is essential for successful ongoing operations.
Parallel Processing
Many transitions include a period where both the old and new processes run simultaneously. This allows comparison of results and identification of discrepancies before fully cutting over to the new provider.
Go-Live and Stabilization
Once parallel processing validates the new system, you transition fully to the provider. A stabilization period follows where issues are identified and resolved, processes are refined, and the working relationship is established.
Managing an Outsourcing Relationship
Successful outsourcing requires ongoing attention to the relationship. Key practices include:
- Clear Communication – Establish regular touchpoints and escalation procedures
- Defined Metrics – Agree on key performance indicators and track them consistently
- Issue Resolution – Address problems promptly before they escalate
- Change Management – Communicate operational changes that may affect the provider
- Periodic Reviews – Conduct regular business reviews to assess performance and plan for the future
Outsourcing is a partnership that requires investment from both parties to succeed. Operators who treat their providers as strategic partners rather than mere vendors typically achieve better results.
Industry Trends in Oil and Gas Outsourcing
The oil and gas outsourcing industry continues to evolve. Current trends include increased automation of routine tasks, integration of artificial intelligence for data analysis and exception handling, cloud-based platforms enabling real-time visibility, expanded service offerings beyond traditional accounting, and growing emphasis on data security and privacy. Operators benefit from these innovations as providers invest in technology and process improvements.
As the industry faces ongoing cost pressures and workforce challenges, outsourcing is likely to remain an important strategy for operators seeking to maintain efficient operations while focusing on their core business of finding and producing oil and gas.
